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Security for costs in fraud claims

This article explores security for costs applications in claims where fraud is pleaded.

What is security for costs?

Security for costs is a way for a defendant to ensure it can recover its legal costs should it successfully defend proceedings brought against it. It is a court order requiring a party to pay money into court, or to provide a guarantee as security for the opponent’s costs.

Who can apply for Security for Costs?

Generally speaking, it is those in the position of a defendant in litigation that can apply (including a claimant facing a counterclaim). The purpose of this being that a claimant has choice on whether it incurs the costs of commencing proceedings. A defendant once served with proceedings has no choice and is forced to incur costs in defending the claim. A defendant will want to be certain that if their defence succeeds they are able to recover the costs they were forced to incur in defending the proceedings.

Grounds for Applying for Security

Pursuant to CPR 25.13, an application can be made if one of six grounds is satisfied:

  1. The claimant (whether individual or company) is resident outside the jurisdiction and is not resident in the EU and a number of other countries referred to in the CPR.
  2. The claimant is a company and there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so.
  3. The claimant has changed address since issuing the claim with the intention of evading the consequences of the litigation.
  4. The claimant has failed to give its address in the claim form or has given an incorrect address.
  5. The claimant is acting as a nominal claimant and there is reason to believe it will not be able to pay the costs if ordered to do so.
  6. The claimant has dealt with its assets so as to make enforcement of an order for costs difficult to enforce against it.

Scenario

Fraud often has a devastating financial impact on the victim. In too many cases, the victim may have lost so much money to the fraud that they find themselves impecunious. For example, a company may be on its knees financially due to an employee committing fraud. The company may wish to bring a claim against the employee but is then met by an application from the defendant wanting security for its costs alleging that the company would be unable to pay the defendant’s costs if ordered to do so (even though the very reason it is unable to do so is because of the defendant itself).

A claimant with limited funds would find it challenging to generate enough money to fund their claim and to provide security for the defendant’s costs, should the court order it.

So how does the court deal with this friction?

Exercise of Court’s discretion on whether to grant security

The court has considerable discretion in determining whether to mandate security.
Weighing the potential injustice to either the claimant or the defendant requires a careful consideration of whether a security order is justifiable. Balancing the potential injury to either party in deciding whether to grant or deny such an order is essential.

In a situation where the defendant is alleging the claimant company is impecunious, like in the above scenario, in considering whether to grant security, the court must be firstly satisfied that the claimant can’t pay the defendant’s costs if ordered to do so.

Assuming the court is satisfied that the claimant can’t pay the defendant’s costs (which will include no prospect of raising funds from any other source) the court will go on to consider whether it is just in all the circumstances to make the order.

In Absolute Living Developments Ltd (in liquidation) v DS7 Ltd [2018] the court was satisfied the claimant would be unable to meet the defendant’s costs if ordered to so. The first limb was therefore satisfied. The court then went on to consider whether it was just to order the security. On this basis, the court refused to grant security on the basis that doing so would stifle the claimant’s chances of bringing a genuine claim. In reaching this conclusion, the court considered various factors, including whether the claimant’s inability to pay costs had been brought about by the defendant’s own conduct.

Conclusion

Where a claim has a good chance of success, the court will be reluctant to make an order that will prevent the claim from being pursued. The fact that the claim may be stifled is a factor to weigh in the balance and the court has to consider whether the stifling of the claim would be unfair. In considering whether it is unfair, the court are likely to take into consideration the defendant’s own conduct, particularly where there is a serious allegation such as fraud.

For claimants who have a good arguable case and are impecunious due to their opponent’s fraud, there may be hope even when an application for security is made. The extent of this will vary depending on the facts of each case. The key point to take away is that it is essential to seek legal advice as early as possible to ensure the correct course of action is taken.

Author, Kelly Stott

Should you require advice regarding this or any other financial crime matters, please do not hesitate to get in touch at hello@tenetlaw.co.uk

Published on April 17, 2023

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